Why Omega Healthcare Investors Inc (OHI) Stock Is Worth the Risk

The great mutual fund manager Ron Baron refers to “sunrise industries” as those industries where long-term secular growth is under way. The opposite, “sunset industries,” are industries whose life cycle is coming to an end. I consider some retailers to be sunset industries. However, businesses that focus on elderly health care are what Baron considers to be sunrise industries. Omega Healthcare Investors Inc (NYSE:OHI) may fit that description.

Why Omega Healthcare Investors Inc (OHI) Stock Is Worth the Risk

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OHI stock, like many healthcare real estate investment trusts, depends a lot on demographics. The trend for senior living is very favorable, and we can also thank the government for messing things up to such a degree that healthcare REITs will see benefits.

For starters, we know that America has an aging population. The Population Reference Bureau states that, “The number of Americans ages 65 and older is projected to more than double from 46 million today to over 98 million by 2060, and the 65-and-older age group’s share of the total population will rise to nearly 24 percent from 15 percent.”

That is good for OHI and other healthcare REITs. However, there is another trend that helps this investment thesis. There’s something called Certificate of Need laws, which exist in 36 states.

The Backbone of OHI Stock

The Mercatus Center, which studies markets, discovered that CON laws, “prohibit health care providers from entering new markets or making changes to their existing capacity without first gaining the approval of state regulators … The existence of a CON program is detrimental to the welfare of the residents of the state, regardless of the number of restrictions. Even for states with only a few restrictions … the presence of a CON program in a state is associated with fewer hospital beds, Computed Tomography (CT) scanners, and MRI machines.”

Increasing demand, restricted supply. We know what that means. Prices will increase, and therefore the cost of skilled nursing facilities will increase, and therefore that is good for OHI stock. Omega Healthcare buys and sell facilities, and as of the end of Q1, had just under 1,000 facilities with almost 100,000 beds across 46 states.

With REITs, I always like to make sure the debt burden is manageable. It has several debt issues with maturities spread out over the next ten years, and very little due in the near future (which will likely be easily refinanced). $90 million is due next year, which is the only draw on its $1.25 billion revolver. $500 million in term notes are due in 2019, like to be refinanced, and nothing else is due until 2021. Very little of this debt is even encumbering the assets.

EBITDA is robust, with debt sitting at about 4.8x to annual cash flow.

Bottom Line on Omega Healthcare

The most recent earnings report was also solid. OHI stock had diluted FFO of $181 million against $154 million last year. Adjusted FFO hit $177 million while operating revenue was $232 million, a 10% increase over last year’s $213 million.

Of course, healthcare REITs are attractive for their ability to pay dividends. OHI slightly increased its quarterly dividend by $0.01 to $0.63 per share, and that was its 19th consecutive quarterly increase. That equates to a 7.6% yield.

Now, there are some risks to be aware of. More than half of the facilities that OHI operates depend on Medicaid as a source of revenue. Congress is still trying to do something about Obamacare, but there was a significant Medicaid expansion under Obamacare. If Omega Healthcare’s facilities get less reimbursement, that could harm the company’s revenue situation. Medicaid could get capped in any new legislation, or it may not be because of the very demographics I mentioned earlier.

There is risk here with OHI stock, although I don’t think it’s as profound as the most bearish investors believe it to be.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

Article printed from InvestorPlace Media, https://investorplace.com/2017/07/omega-healthcare-investors-inc-ohi-stock-risk/.

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